Medtronic External and Internal Analysis Essay

Medtronic Inc. can easily be compared to le Concorde, a turbojet supersonic passenger airliner first flown in 1976. This jet was more than twice as fast as any other airliner ever created, flying at speeds of up to 1,350 mph. The capability to fly at more than twice the speed of a regular airliner equates to twice the flights and premium prices for this astonishing service. The resulting profitability of le Concorde is what puts this machine at the top of its class. In 1957, Medtronic founder Earl Bakken created Medtronic’s Pacemaker, the first wearable device to treat abnormally slow heart rates. The Pacemaker is now the staple product of Medtronic and can be compared to le Concorde for its innovation, efficacy, and profitability. This is just one example of Medtronic’s ability to use its innovation to transform the treatment of chronic disease worldwide. The firm has been a leader in the Medical Device Manufacturing industry for over two decades, developing and manufacturing innovative medical devices to treat more than seven million patients each year. Its products include pacemakers, defibrillators, heart valves, and stents, among others. Medtronic’s drive for excellence is best summed up by its corporate mission, â€Å"To contribute to human welfare by application of biomedical engineering in the research, design, manufacture, and sale of instruments or appliances that alleviate pain, restore health, and extend life† (Medtronic. com). To achieve its goals and maintain success, Medtronic must constantly monitor and evaluate its external environment and the forces in it that could affect the company. The Medical Device Manufacturing industry is exposed to numerous forces and trends that can generate opportunities for firms to exploit as well as threats for firms to avoid. Of note are the effects of rivalry, buyers, regulation, and globalization trends. The Medical Device Manufacturing industry, as a whole, has grown at an annual rate of 18. 9% since 2005, contributing to a high level of industry attractiveness (ibisworld. com). Medtronic is the clear leader with 17. 2% market share. Its closest rivals, Boston Scientific and St. Jude Medical, have market shares of 2. 8% and 4. 8%, respectively (ibisworld. com). Recently, the industry has seen a dramatic increase in consolidation as larger firms have cquired smaller operations in an effort to diversify their portfolios and gain market share. This shrinkage has resulted in greater industry concentration, increasing the rivalry among these key players. Focusing on a more narrow analysis of the Cardiovascular Device segment reveals a similar, more intensified, environment for rivals. Compared to the overall industry, this specific segment has recently witnessed much lower growth rates because the market is saturated with products that have little differentiation and limited innovation possibilities. For this reason, merger & acquisition activity is especially prominent among top firms seeking to create strategic competitiveness. They have identified the threat of rivals and are looking to gain additional resources and capabilities through diversification. The role of buyers is very unique in this industry. While individual patients are the ultimate consumers of medical devices, firms often focus on healthcare providers when selling products. This is because patients in the market have low brand recognition of the devices they use. Instead, they rely on their hospitals and physicians to recommend products for treatment. It is important for manufacturers to understand this distinction since it is these physicians and other providers that have the greatest brand loyalty. That said, individual patients still drive demand for products, and their satisfaction remains the ultimate goal. One key demographic trend of buyers is the aging U. S. population. As life expectancies continue to rise, and the baby boomer generation ages into their late sixties and seventies, this expanding age group will create a great opportunity for medical device manufacturers. For example, elderly patients experience a higher occurrence of health issues compared to the aggregate market, driving demand for medical devices upward. In fact, 40% of all patients diagnosed with heart disease or arthritis are 65 or older (ibisworld. com). The Medical Device Manufacturing industry is also subject to tight regulations, both domestically and internationally. For example, a new device may require a four-year trial before it appears on the market so that the Food and Drug Administration (FDA) can test its long-term effects. Products in Europe, meanwhile, undergo a different regulatory process; products are often introduced in Europe two to four years before they are available for patients in the U. S. Furthermore, compliance with these regulations requires firms to devote significant additional resources, often detracting from investments such as Research and Development. Along with these initial requirements, devices are constantly monitored for defects, which can result in product recalls that damage brand reputation and hurt profits. Globalization trends will certainly continue to have a strong impact on the industry, creating both opportunities and threats. Research shows that exports account for 21. 6% of industry revenue with an expected 2010 growth rate of 3. 9% (ibisworld. com). By developing these export markets, firms can work to maximize capacity utilization as they expand their distribution channels to reach more customers and generate more revenue. This is especially true of developing economies, in which 80% of chronic-disease-related deaths occur. Large portions of these markets are greatly underserved and demand is not being met. In addition, by diversifying into different geographic markets abroad, firms are able to mitigate the risks associated with being too dependent on the domestic market. The emergence of globalization also introduces several threats that firms must be aware of. For one, the competitive landscape changes as companies establish operations sites in foreign countries. When this happens, the demand in export markets declines since customers can purchase devices locally. Exporting firms must then reevaluate their international strategies and consider establishing similar operations of their own. Another threat globalization brings is that of increased competition. Manufacturers constantly fight to expand their geographic reach and to gain control of underserved markets. Given the effects of strong forces and emerging trends in the Medical Device Manufacturing industry, firms should strive to possess a key group of success factors in order to gain strategic competitiveness. The first factor is employees; they must be highly skilled and knowledgeable since the devices they design and produce are very complex. Second, economies of scale allow firms to improve profitability by reducing variable costs in manufacturing, which, in turn, lowers prices for customers. Third, as previously mentioned, the importance of global positioning cannot be understated. In order to compete in the industry, firms must make a global presence, expanding geographic scope and penetrating underserved markets. Finally, access to the latest innovations is imperative. To acquire new technologies, firms must invest considerable resources into Research and Development. Not only must they develop new technologies, but they must also look for ways to continuously improve existing products through high levels of innovation. This understanding of the industry environment is essential when considering a firm’s internal strategies. At the business-level, Medtronic possesses a number of strengths and competencies that are used to create a competitive advantage and contribute to the overall performance of the company. In particular, its research and development efforts along with its superior human resources drive the firm’s differentiation strategy in the Cardiac Rhythm Disease Management (CRDM) unit (see appendix for more strengths). This sector remains the firm’s most profitable product market, accounting for $5. 268 billion of Medtronic’s $15. 817 billion total net sales in 2010 (Medtronic). As a percentage of those sales, Research and Development expenses equated to 9. 23%, a total of $1. 46 billion. Moreover, this expense has seen a Compound Annual Growth Rate of 8. % in the last 5 years, indicating Medtronic’s continued confidence in its ability to create value through the investment in research and development. The innovation fostered by research and development in CRDM has allowed Medtronic to create many new products; the complex nature of these products makes them rare and costly to imitate. They often even trump and replace the existing technology in the mar ket, making them highly valuable and unsubstitutable. These key innovations, therefore, give Medtronic a significant competitive advantage in research and development. For example, the CRDM unit recently introduced a new leadless pacemaker. Once implanted into the heart via catheter, the penny-sized device permanently latches into the flesh with tiny claws. Doctors can then wirelessly monitor and control the pacemaker. Medtronic’s demonstration of reduced size and wire elimination will create a new standard for such devices in the industry, making current, bulky pacemakers obsolete, and giving Medtronic a sustainable competitive advantage. Medtronic’s 40,000 employees also play a key role in the success of CRDM and of the company as a whole. They are the source of one of Medtronic’s most valuable intangible assets: knowledge. With a thorough understanding of human physiology and a breadth of technical skills, employees are a driving force behind the company’s groundbreaking innovations. They generate ideas and implement processes that create new or improved products or therapies. These advancements require that employees are well trained and possess a high degree of knowledge about the products or therapies they develop. In addition to the actual production of products, employees extend their knowledge to customers. By educating healthcare providers and users about the devices, employees ensure that patients safely receive the full benefits of Medtronic’s products. One way Medtronic optimizes its human resources is through collaboration blogs and internal grants. The company’s Quest program awards project grants that encourage employees to test their own ideas for product innovation. Nearly 25% of these projects eventually become a product or some part of a therapy. For example, employee Brain Lee had an idea to create an effective diagnostic tool for patients who suffered from unexplained fainting. With funding from the Quest program, Lee modified a pacemaker by adding self-contained electrodes. The device could be implanted just below the skin, recording electrocardiogram (ECG) signals in an endless loop. Much more effective than existing external tools, Lee’s device received additional funding, leading to successful clinical trials, and, eventually, a commercial release. This is just one example of how Medtronic’s strong workforce creates a core competency for the firm, one that is unmatched by its rivals. Furthermore, the innovations developed by employees and through research and development efforts can often be protected with patents, generating competencies that are not only distinctive, but also sustainable. At the corporate level, Medtronic is very well positioned. The firm outperforms its rivals in terms of market share with 17. 2%, compared to Boston Scientific and St. Jude Medical, which hold 2. 8% and 4. 8% market share, respectively. Since 2007, Medtronic has experienced an 8. 75% compound annual growth rate. While lower than St. Jude’s growth rate of 12. 3% in the period, it is noticeably higher than that of Boston Scientific’s, 6. 84% (See appendix for further financial comparisons). Medtronic’s corporate-level strategy defines which businesses it will be in as well as how it will integrate those businesses to grow and deliver value to stakeholders. The firm currently operates in seven business units: CRDM, Spinal, CardioVascular, Neuromodulation, Diab etes, Surgical Technologies, and Physio-Control, all of which are largely related. Because of Medtronic’s strong war chest, it has been able to focus its growth strategy around acquisitions. Since 2009, the firm has purchased nine companies, including ATS Medical Inc. and CoreValv Inc. , requiring a significant cash investment. In fact, Medtronic spent $370 million when it bought heart valve maker ATS Medical. The firm’s acquisition strategy specifically targets two types of purchases: those that will add immediate revenue to existing businesses, and those that add to Medtronic’s technology portfolio by providing expertise the company does not have. Of late, the firm has been focusing on the former, targeting smaller companies that lack the resources to complete clinical trials and gain FDA approval. Chad Cornell, vice president of corporate development at Medtronic, notes, â€Å"Size is obviously a factor, but it’s not what we start with. † Instead the question is â€Å"how can we add value? That’s the key lens† (Lee). Medtronic’s international strategy is best characterized as a global strategy whereby it develops devices in the United States to be distributed across country markets. To support this strategy, it uses a worldwide product divisional structure. Medtronic has recently changed its strategy, implementing a Global Realignment Initiative in 2008. The goal of the initiative is to reorganize the firm’s resources to focus on areas that add the most value and have the most attractive growth opportunities. Prior to 2008, the company had segmented its global market into the United States market and international markets. Under this new strategy, Medtronic will focus around developed markets and emerging markets, using its resources and capabilities to effectively meet each segment’s unique needs. Developed markets include regions such as the United States and Europe where trained healthcare professionals are familiar with current devices, and new, innovative products are readily accepted. Medtronic relies on its strong innovation capabilities and Research and Development investments to meet the demands of this segment. For example, patients with pacemakers are often denied potentially life-saving MRI scans due to possible pacing interference. Medtronic used its superior innovation and product knowledge to address the concern, manufacturing the world’s first pacemaker that is compatible and safe to use with MRI systems. Introduced in Europe in 2008, this innovative device provides a much-needed solution to millions of people who will now be able to receive the full benefit of a safe MRI scan. Emerging markets, meanwhile, include regions such as China, Brazil, Africa, and the Middle East, where access to care is often limited, and physicians may be unfamiliar with certain medical devices and hesitant to accept new products. In this segment, Medtronic depends on its employees and its reliable, high-quality products. Using these strengths, it focuses on training and educating healthcare providers so that products and treatment are much more accessible to underserved patients. At present, Medtronic operates in more than 120 countries, with more than 16,000 employees in communities outside the United States (Medtronic. om). These employees provide immense value to the company by using their extensive knowledge and skills to educate and collaborate with physicians around the world. Currently, 41% of total revenues are realized outside of the United. Medtronic plans to continue its geographic diversity strategy, aiming to become a â€Å"truly boundaryless organization† an d maintain its commitment to â€Å"making a sustained, global impact in the fight against chronic disease† (Medtronic). In order to keep its world-class status, Medtronic executes various tactics at each of its organizational levels in order to protect its strategic competitiveness. For example, the company uses a frontal assault on its biggest competitor, Boston Scientific. By using revenues created from CRDM, they have the capability to invest large investments into research and development in ways that Boston Scientific cannot. In doing so, they maintain continuous development and improvement of innovative products. Another tactic that Medtronic uses is the pre-emptive strike, identifying and evaluating a valuable opportunity and seizing it before a rival does so. This increases sales, differentiates Medtronic from competitors such as Boston Scientific, and helps foster innovation. Based on the analysis of Medtronic’s external environment and internal strategies, it is clear that the firm is a leader in the Medical Device Manufacturing Industry. However, there are also some key problems and issues the firm should address. Medtronic has had litigation issues over the past few years with recalls in various different product offerings as well as patent and licensing disputes. As noted on the 2010 annual report their litigation charges amounted to nets of, $374 million in 2010, $714 million in 2009, and $366 million in 2008 (36-37). This has been an industry wide issue as seen by Boston Scientifics 2009 litigations charges amounting to $2. 022 billion, $334 million in 2008 and $365 million in 2007 (Boston Scientific Annual Report pg. 69). With these industry wide litigation issues, the FDA is currently creating new standard procedures for testing products and time required to introduce them into the market, which creates a separate challenge in dealing with the new health care reform. In a recent interview with Brian Johnson from Massdevice. om, the CEO of Medtronic, Bill Hawkins outlines the challenges ahead with the new health care reform. â€Å"The new medical device tax will cost us $150 to $200 million per year when introduced in 2013. In 2010 we spent $1. 5 billion on R&D and this tax will directly affect that budget for us which hurts our innovation, or possibly investments in emerging markets†. Cleary the health care reform will be one of the toughest challenges ahead for Medtronic and the rest of the medical device industry.